Brexit deal could accelerate interest rate increases

The Bank of England has indicated there could be a faster pace of interest rate increases if the UK manages a smooth exit from the European Union.

Although the Bank kept rates unchanged at 0.75% this month, its latest forecasts suggest that rates could rise to 1.5% over the next three years.

It said that Brexit uncertainty was preventing some firms from investing.

However, Bank governor Mark Carney said a smooth Brexit could see a rebound in that investment.

“We do expect a rebound in demand. Business is taking a cautious approach right now as we are at a point of maximum uncertainty, so we have some sense of what is being held back, so we will see a rebound in investment,” Mr Carney said.

Some economists think the Bank might have to be even more aggressive on interest rates.

Ruth Gregory, UK economist at Capital Economics, believes that if the UK strikes a deal soon, rates could rise three times in 2019.

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Media captionBank of England Governor Mark Carney.

Samuel Tombs at Pantheon Macroeconomics says two rate increases next year “remain a good bet”.

“An abrupt and disorderly withdrawal could result in delays at borders, disruptions to supply chains, and more rapid and costly shifts in patterns of production, severely impairing the productive capacity of UK business,” the Bank said.

It also thinks the pound would fall and there would be a “large” and “immediate” fall in economic activity.

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